Apple is spending billions on research, innovation

  • Article by: JUL and AMP;#XAD;IA LOVE , San Jose Mer­cury News
  • Updated: August 23, 2014 - 2:00 PM
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Apple CEO Tim Cook, has led a year of blockbuster acquisitions. In the first three quarters of 2014, Apple has spent $898 million in cash to buy firms.

Photo: Jeff Chiu Associated Press,

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As rumors swirl about new Apple pro­ducts that may be on the way, one thing is for sure: The com­pany is doub­ling down on R&D.

The Cupertino, Calif.-based com­pany has shift­ed re­search and de­vel­op­ment into o­ver­drive this year, spend­ing $1.6 bil­lion in the third quar­ter, up 36 percent from the same pe­riod last year. At this rate, Apple’s spend­ing will be up 60 percent year-over-year by the fourth quar­ter, ac­cord­ing to a Morgan Stan­ley re­port re­leased this week.

Investors and tech jun­kies watch close­ly for any hints about Apple’s high­ly an­tic­i­pated prod­uct launch­es. Com­ing four years af­ter Apple last en­tered a new prod­uct cate­go­ry with the iPad, the spike in R&D spend­ing sug­gests that Apple has much more in store than a new ver­sion of one of its sig­na­ture de­vices, ana­lysts say.

“This shows that they in­tend to make good on their im­plic­it prom­ise of life af­ter iPhones and iPads,” said John Jackson, a re­search vice pres­i­dent at IDC.

But ana­lysts di­verge on how close to launch the products may be. In light of the R&D spending spree, Morgan Stan­ley an­alyst Katy Huberty predict­ed in her re­port that Apple will soon en­ter a new product catego­ry, not­ing that the com­pany ratch­et­ed up its R&D spend­ing be­fore launch­ing the iPod, iPhone and iPad. Indeed, Apple is now de­vot­ing 4 percent of its rev­e­nue to R&D, a level it has not reached since short­ly be­fore the ori­gi­nal iPhone’s 2007 re­lease.

Still, R&D is a long game, and a hike in spending does not nec­es­sarily mean a product launch is im­mi­nent, ana­lysts say.

Apple CEO Tim Cook “has the lux­u­ry of a little bit of time and a whole lot of mon­ey to in­cu­bate what’s next,” said Jackson, the an­a­lyst.

Even with the up­swing, Apple’s R&D spend­ing is still mod­est by some meas­ures. Com­puter and e­lec­tron­ics com­panies gen­er­al­ly de­vote 6.5 percent of their rev­e­nue to R&D, ac­cord­ing to a 2012 study by con­sult­ing firm Booz & Co., and some spend much more.

Apple is known for its ef­fi­cient R&D, ana­lysts say. While it is cost­ly to pio­neer a new prod­uct, Apple has not had to spend huge sums in years when it mere­ly up­dat­ed its ex­ist­ing de­vices, Jackson said. “They are mas­ters of in­cre­men­tal in­no­va­tion.”

Apple’s slim lineup of pro­ducts also helps keep costs down, said Tom Mainelli, a program vice pres­i­dent at IDC. “They don’t have a thou­sand irons in the fire,” he said.

Apple has also had a year of block­bust­er ac­qui­si­tions, an­oth­er tool com­panies can use to boost in­no­va­tion. In the first three quar­ters of this year, Apple spent $898 mil­lion in cash to buy firms, ac­cord­ing to Morgan Stan­ley.

“It’s a re­flec­tion of Tim Cook mak­ing this his com­pany and bas­i­cal­ly pull­ing all the le­vers,” he said.

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